If you are primarily a bottom-up investor, you focus on one company at a time and dig into their financial fundamentals. As you learn more about the company, you reach certain decision points where you continue your analysis or drop the company and move on to another.
The top-down investor looks at a particular sector or industry based on economic and market trends. Once a sector or industry grouping is identified as promising, the investor begins researching companies within the field.
Don’t Match
Either way you start your process, stock screens can help you eliminate many companies that don’t match your criteria.Stock screens are available for free on many sites and you will do yourself a favor if you learn to use them.
Stock screens can sort through thousands of companies to find those that meet the criteria you select. This is a wonderful timesaving for you, but don’t be fooled into thinking that screens will do all the work for you.
Screens crunch numbers, but even the best screens may be working with data as much as three months old – much can happen in that time.
Don’t Tell
Screens tell you nothing about the qualitative aspects of a company, such as the management team, brand loyalty, dramatic changes in laws or regulations, and other considerations that don’t show up on a financial statement.Still, if you are picking stocks without using a screen, you are not using one of the best tools available to you.
Screens are absolutely unemotional. You plug the numbers in and what you get is what you get – there is no fudging.
This takes some of the emotion out of the buying part of the trade and it can help on the selling side too. Periodically run the screen again and see if the stock you bought keeps showing up.
Red Flag
If it doesn’t make the screen that is a red flag to find out what has changed from your original parameters when you bought the stock. Depending on how you set up the screen, it could be a good thing that’s pushed the stock out of the screen.However, it’s likely that some key financial ratio is no longer in the range you said was acceptable. If that’s the case, you need to find out what’s going on with the company and consider selling the stock if major negative changes are in the works.
Conclusion
Whether you’re to bottom-up or top-down investor, stock screens can help you identify likely prospects for purchase. Screens can also warn you that a stock you own is moving away from the financial strengths that you desire.Stories in this Series
Stock Screening Basics
You Should be Using Stock Screens
Characteristics of a Good Stock Screen
Don't Let Stock Screens Cloud Your Judgment
Stock Screens for All Investors
Stock Screening Tools You May Want to Consider
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